- Real estate investment trusts (REITs) provide solid income and inflation protection in troubled times.
- American Tower (AMT): Cell phone towers are a reliable growth vehicle given global telecom demand trends.
- Crown Castle (CCI): Crown Castle is another leading player in the wireless communications infrastructure space.
- Cubesmart (CUBE): Self-storage is a surprisingly robust REIT category that holds up during economic setbacks.
- Life Storage (LSI): Life Storage is a strong growth operator within the self-storage niche.
- Mid-America Apartment Communities (MAA): Rents are going up, and MAA stock can help investors benefit.
- Equity Residential (EQR): Equity Residential is another leading apartment REIT with a focus on large gateway cities.
- American Homes 4 Rent (AMH): The booming housing market should bolster this REIT’s prospects as well.
It’s clear that inflation and economic risk are becoming the major themes for the rest of 2022. Tech growth stories are yesterday’s news and economic reopening stories are largely played out. Now, it’s seemingly time to pay the price for all the stimulus and excessive consumption that occurred since 2020. Inflation tends to be a negative phenomenon for most of the economy. Certainly, the stock market is having a rough 2022 as investors prepare for lower earnings and a worse economic outlook. However, real estate investment trusts (REITs) can buck that trend.
REITs are uniquely designed to withstand inflation. For one, REITs tend to use a lot of debt to acquire properties. As inflation hits, the value of those borrowed dollars declines, essentially inflating away much of a REITs’ obligations. On the asset side, however, the value of land and buildings appreciates nicely in nominal terms due to inflation. This has a favorable impact on a REIT’s overall balance sheet. Meanwhile, REITs are also able to raise prices on customers with inflation. This effect is particularly pronounced in certain categories such as storage and housing.
That gives a sense of where there are particularly interesting opportunities for REIT investors in the current economic landscape. These seven REITs are well-positioned for the rest of 2022.
|AMH||American Homes 4 Rent||$36.60|
American Tower (AMT)
American Tower (NYSE:AMT) is the largest U.S.-based REIT out there by market capitalization. Its size highlights its appeal for REIT investors; the company has an excellent balance sheet and unmatched set of communications-related holdings. It operates more than 221,000 communications towers and sites around the globe; 43,000 of these are in North America with the balance being overseas.
Cell phone towers might seem like a mature market. However, American Tower has been able to keep growing aggressively by building new sites in less penetrated regions such as Latin America and India. The company achieves tremendous operating margins because it is usually able to rent properties out to two or even three different telecom providers. With global demand for data continuing to rise, American Tower should be able to keep executing on its business strategy. Meanwhile, AMT stock is down 18% year-to-date, offering a nice entry point.
Crown Castle (CCI)
Crown Castle (NYSE:CCI) is one of American Tower’s major rivals. It has differentiated itself by betting more on small sites rather than the traditional cell phone towers. Regardless, it has been a fast-growing market with plenty of space for both types of operators. In particular, now, 5G demand is creating a lot of additional demand for Crown Castle’s core product offerings.
CCI stock is now down 14% year-to-date, and is only up slightly since the beginning of 2020. Given the continuing rise in demand for mobile data and data-heavy innovations such as the “internet of things” and autonomous driving, it seems safe to say that demand for mobile communications bandwidth will continue to surge throughout the decade. That should pave the way for another solid run-up in CCI stock.
Self-storage has historically been an excellent niche within the REIT space. It tends to be counter-cyclical. Intuitively, you might think demand for storage would fall during a hard economy. But, it actually tends to drive additional demand.
In 2009, for example, storage REITs did far better than peers. It seems as people were foreclosed upon or moved to smaller houses, it drove a great deal of incremental demand for storage. Some prominent hedge funds and analysts were betting against self-storage in 2009 and got smoked on their trade.
Fast forward to today. Cubesmart (NYSE:CUBE) should be well-positioned for the current economy. High inflation has allowed storage operators to push through price increases for customers. Meanwhile, the booming housing market has caused a lot of people to move between locations. As people move into new homes or apartments, it creates an opportunity for people to need some additional storage to take care of things for a time.
CUBE stock has slumped from $57 to $41 in recent months despite favorable industry dynamics. This has pushed the stock down to a reasonable 18 times funds from operations (FFO), and the dividend yield has once again moved up to 4%.
Life Storage (LSI)
Given how strong storage tends to be regardless of economic conditions, it’s worth putting another storage name on the list. Life Storage (NYSE:LSI) is more of a growth name on the storage space, as it has grown FFO more than 10% compounded annually over the past decade. Since 2010, Life Storage has gone from 377 storage locations that it owned or ran through a joint venture (JV) up to 1,076 locations as of 2021.
Given Life Storage’s ambitious growth capacity, shares have tended to trade at a slightly higher valuation multiple than its direct peers such as Cubesmart. With the recent selloff in LSI stock, however, shares are now under 19x FFO and offer a 3.5% dividend yield.
Mid-America Apartment Communities (MAA)
Mid-America Apartment Communities (NYSE:MAA) is a Tennessee-based apartment REIT. It concentrates on what are known as the sun belt states; Mid-America is prominent in the South, Mid-Atlantic and Southwest. It holds an ownership interest in more than 102,000 apartments across 14 different states and the District of Columbia.
Apartments have been a hot investment category in recent years. Given the country’s current demographic situation, there has been significant household formation beyond existing housing capacity. Homebuilders built a low number of new houses in the 2010s, forcing more new families to choose apartments instead.
Now throw in a roaring post-pandemic housing market, and rents are surging. Most publicly traded apartment REITs are reporting strong numbers, and Mid-America is no exception. It saw its 2021 new lease rates surge 11.8% on average, and its rent renewals rise 9.7% for 2021 as well.
If you’re in the market for a new housing situation this year, it’s hard to avoid rising rent or mortgage payments. However, MAA stock’s 2.5% dividend yield and history of strong share price appreciation could help ease the burden from housing cost inflation.
Equity Residential (EQR)
Equity Residential (NYSE:EQR) is another of the nation’s premier apartment companies. It’s unique from Mid-America due to the geographies it serves. Instead of betting on the sun belt, Equity has gone for top-tier cities such as New York, Boston, Seattle and San Francisco. Equity currently controls more than 300 different properties with nearly 80,000 apartments in total.
EQR stock has historically traded at an elevated valuation compared to other REITs. However, EQR stock has slumped from $94 to $75 over the past month. That has pushed the stock down to a more palatable 21 times FFO while pushing the dividend yield up to 3.4%.
American Homes 4 Rent (AMH)
American Homes 4 Rent (NYSE:AMH) is another way to play the booming housing market angle. Unlike the apartment REITs, American Homes 4 Rent has bought up individual single-family residences — it held more than 57,000 of them across 22 states as of year-end 2021.
Unlike apartments, there is less of a proven business model for owning individual homes at a massive scale. Investors were skeptical that the numbers would pencil out, but now private equity firms such as Blackstone (NYSE:BX) are making major bets in the sector. This could indicate that American Homes 4 Rent has a great business model after all.
AMH stock isn’t cheap at the moment with shares going for almost 24 times FFO and a dividend yield of just 1.9%, That said, it’s hard to deny the pent-up investor demand for single-family housing, and AMH stock is one of the best pureplay ways to get exposure to that trend.
On the date of publication, Ian Bezek held a long position in AMT stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.